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BoE Strikes a Cautious Tone on Global Growth Concerns

BoE Strikes a Cautious Tone on Global Growth Concerns

2015-10-09 23:51:00
James Stanley, Currency Strategist
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BoE Strikes a Cautious Tone on Global Growth ConcernsBoE Strikes a Cautious Tone on Global Growth Concerns

Fundamental Forecast for British Pound:Neutral

The British Pound continues to trade with a mean-reversion tendency as prognostications around future rate hikes are becoming even more complex given the headwinds being seen by the global economy. We heard quite a bit about these headwinds at the most recent Bank of England rate decision, as the bank, once again, voted 8-1 to keep rates unchanged. The lone dissenter was, again, Mr. Ian McCafferty who had even voted to hike rates five times between August 2014 to December 2014; when there were no signs whatsoever of inflation within the British economy. At this point, we can safely label Mr. McCafferty a ‘hawk,’ but he’s outnumbered by a cautious Central Bank that wants to evaluate the economic situation on a global scale before kicking rates higher. The last rate hike from the Bank of England was in July of 2007 when the bank moved rates up to 5.75% before tempering them back down later in the year, beginning a cycle of low (and lower) rates that has yet to stop.

The head of the Bank, Mr. Mark Carney, called the current state of the global economy a ‘pretty unforgiving environment.’ Mr. Carney also went on to say that the timing of the BoE’s first move will not be dependent on the Federal Reserve as many have come to expect, and despite continued signs of recovery after upbeat British growth in the first half of the year slowed in the 3rd quarter, the bank’s rate decision should come ‘into sharper focus’ around the end of the year.

After seeing recent clues of inflationary pressure, primarily from wage growth, expectations for a BoE rate hike had begun creeping higher over the past two months. But as the circling troubles of China (and Asia), Emerging Markets and Commodity prices have thrown a wrench into global growth plans, expectations for inflation (and rate hikes) have been moving accordingly lower. Markets are now not pricing in a quarter-point rate hike until all the way out to 2017; and the Bank of England is expecting inflation to remain below one percent until spring of 2016, so there really isn’t any hurry to hike.

The Monetary Policy Committee will publish new inflation forecasts next month and this could provide direction for the Sterling should the bank push their expectation for a return to 2% inflation back to August of 2017. While this could equate to Sterling weakness, GBP/USD has to contend with a US Dollar that’s seeing a dramatic drop after the FOMC minutes showed another cautious Central Bank on the other side of the Atlantic.

The forecast for the Pound remains neutral for now, until a more defined fundamental direction can develop as the world grapples with slowing growth and a lackluster economy a full six years after the financial collapse. The UK and the BoE are one of the few spots other than the US that might be looking at higher rates in the not-too-distant future; but should matters change and should growth continue slowing, those expectations for higher rates will likely diminish and these currencies (both GBP and USD) could face massive weakness as rate-hike bets price out of the market.

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